“Second quarter bookings were a record by a significant margin, up 25%
from the previous record for a second quarter. Earnings per share were
well ahead of guidance, further increasing our confidence in our outlook
for the year,” said Walden C. Rhines, chairman and CEO of Mentor Graphics®
Corporation. “Systems business was a key driver of strength in the
quarter. Traditional PCB design software bookings were up nearly a third
and bookings in new and emerging products, led by the Capital electrical
systems design software, nearly tripled. Scalable verification, which is
used by both systems and IC customers, had bookings growth of 60%.”

During the quarter, the company expanded the Capital®
electrical systems design product suite with three new products,
addressing configuration complexity, harness manufacturing and vehicle
documentation and maintenance. In the multi-physics simulation space,
the company announced the new FloEFD™ for Siemens NX product for
computational fluid dynamics simulation. In embedded software, Mentor
introduced a unified embedded software debugging platform from
pre-silicon to final product, and the Mentor® Embedded
Sourcery™ CodeBench product, a next-generation, integrated development
environment based on the open-source GNU toolchain.

“Record bookings for a second quarter and continued strong cost controls
led to another excellent quarter for the company,” said Gregory K.
Hinckley, president of Mentor Graphics. “Leading indicators of the
business remain very strong, with new customers up 15% in number and 35%
in value over the previous second quarter. We see no slowdown in EDA
spending.”

Outlook

For the third quarter, the company expects revenues of about $245
million, non-GAAP earnings per share of about $0.21, and GAAP earnings
per share of approximately $0.18. For the full year, the company now
expects revenues of approximately $1.004 billion, non-GAAP earnings per
share of about $1.03 and GAAP earnings per share of approximately $0.68.

Fiscal Year Definition

Mentor Graphics’ fiscal year runs from February 1 to January 31. The
fiscal year is dated by the calendar year in which the fiscal year ends.
As a result, the first three fiscal quarters of any fiscal year will be
dated with the next calendar year, rather than the current calendar year.

Discussion of Non-GAAP Financial Measures

Mentor Graphics’ management evaluates and makes operating decisions
using various performance measures. In addition to our GAAP results, we
also consider adjusted gross margin, operating margin, net income
(loss), and earnings (loss) per share which we refer to as non-GAAP
gross margin, operating margin, net income (loss), and earnings (loss)
per share, respectively. These non-GAAP measures are derived from the
revenues of our product, maintenance, and services business operations
and the costs directly related to the generation of those revenues, such
as cost of revenue, research and development, sales and marketing, and
general and administrative expenses, that management considers in
evaluating our ongoing core operating performance. These non-GAAP
measures exclude amortization of intangible assets, special charges,
equity plan-related compensation expenses, interest expense attributable
to net retirement premiums or discounts on the early retirement of debt
and associated debt issuance costs, interest expense associated with the
amortization of debt discount and premium on convertible debt, and the
equity in income (loss) of unconsolidated entities (except Frontline PCB
Solutions Limited Partnership (Frontline)), which management does not
consider reflective of our core operating business.

Management excludes from our non-GAAP measures certain recurring items
to facilitate its review of the comparability of our core operating
performance on a period-to-period basis because such items are not
related to our ongoing core operating performance as viewed by
management. Management considers our core operating performance to be
that which can be affected by our managers in any particular period
through their management of the resources that affect our underlying
revenue and profit generating operations during that period. Management
uses this view of our operating performance for purposes of comparison
with our business plan and individual operating budgets and allocation
of resources. Additionally, when evaluating potential acquisitions,
management excludes the items described above from its consideration of
target performance and valuation. More specifically, management adjusts
for the excluded items for the following reasons:

Identified intangible assets consist primarily of purchased
technology, backlog, trade names, customer relationships, and
employment agreements. Amortization charges for our intangible assets
can vary in frequency and amount due to the timing and magnitude of
acquisition transactions. We consider our operating results without
these charges when evaluating our core performance due to the
variability. Generally, the most significant impact to inter-period
comparability of our net income (loss) is in the first twelve months
following an acquisition.

Special charges primarily consist of restructuring costs incurred for
employee terminations, including severance and benefits, driven by
modifications of business strategy or business emphasis. Special
charges may also include expenses incurred related to potential
acquisitions, excess facility costs, and asset-related charges.
Special charges are incurred based on the particular facts and
circumstances of acquisition and restructuring decisions and can vary
in size and frequency. These charges are excluded as they are not
ordinarily included in our annual operating plan and related budget
due to the unpredictability of economic trends and the rapidly
changing technology and competitive environment in our industry. We
therefore exclude them when evaluating our managers' performance
internally.

Equity plan-related compensation expenses represent the fair value of
all share-based payments to employees, including grants of employee
stock options and restricted stock units. We do not consider equity
plan-related compensation expense in evaluating our manager’s
performance internally or our core operations in any given period.

Interest expense attributable to net retirement premiums or discounts
on the early retirement of debt, the write-off of associated debt
issuance costs and the amortization of the debt discount and premium
on convertible debt are excluded. Management does not consider these
charges as a part of our core operating performance. The early
retirement of debt and the associated debt issuance costs are not
included in our annual operating plan and related budget due to
unpredictability of market conditions which could facilitate an early
retirement of debt. We do not consider the amortization of the debt
discount and premium on convertible debt to be a direct cost of
operations.

In connection with the Company’s acquisition of Valor on March 18,
2010, we also acquired Valor’s 50% interest in Frontline, a joint
venture. We report our equity in the earnings or losses of Frontline
within operating income. We actively participate in regular and
periodic activities such as budgeting, business planning, marketing
and direction of research and development projects. Accordingly, we do
not exclude our share of Frontline’s earnings or losses from our
non-GAAP results as management considers the joint venture to be core
to our operating performance.

Equity in earnings or losses of unconsolidated subsidiaries, with the
exception of our investment in Frontline, represents our equity in the
net income (loss) of a common stock investment accounted for under the
equity method. The carrying amount of our investment is adjusted for
our share of earnings or losses of the investee. The amounts are
excluded from our non-GAAP results as we do not control the results of
operations for this investment and we do not participate in regular
and periodic operating activities; therefore, management does not
consider these businesses a part of our core operating performance.

Income tax expense (benefit) is adjusted by the amount of additional
tax expense or benefit that we would accrue if we used non-GAAP
results instead of GAAP results in the calculation of our tax
liability, taking into consideration our long-term tax structure. We
use a normalized effective tax rate of 17%, which reflects the
weighted average tax rate applicable under the various jurisdictions
in which we operate. This non-GAAP tax rate eliminates the effects of
non-recurring and period specific items which are often attributable
to acquisition decisions and can vary in size and frequency and
considers our U.S. loss carryforwards that have not been previously
benefited. This rate is subject to change over time for various
reasons, including changes in the geographic business mix and changes
in statutory tax rates. Our GAAP tax rate for the six months ended
July 31, 2011 is 297%, after the consideration of period specific
items. Without period specific items of ($5.1) million, our GAAP tax
rate is (206%). Our full fiscal year 2012 GAAP tax rate, inclusive of
period specific items, is projected to be 8%. The GAAP tax rate
considers certain mandatory and other non-scalable tax costs which may
adversely or beneficially affect our tax rate depending upon our level
of profitability in various jurisdictions.